Will that insurer your company has been paying premiums to for all of these years stand behind you if you are sued for ERISA violations? Have you just been relying on a broker to give you the coverage you need?
I previously wrote about a decision in which CIGNA’s insurer was permitted to deny coverage for fiduciary breach due to a fraud exclusion in its policy. We have just had another decision from an appeals court in Louisiana in which fiduciaries being sued by the U.S. Department of Labor were denied coverage under each of three separate policies they thought would provide them with legal defense costs and cover any awards assessed against them. Again, the reason was buried in the policy fine print, which even the brokers didn’t seem to understand, if the facts set out in the decision are any indication.
The facts boil down to the following: Plaintiffs had three policies: a D&O policy, fiduciary liability insurance and excess fiduciary coverage. They were sued by the DOL following a formal investigation for selling stock to an ESOP at an inflated price, but the court ruled that the policies didn’t cover the plaintiffs for the following reasons:
- The policies didn’t cover actions taken before the effective date.
- The D&O policy didn’t cover ERISA claims at all.
- Plaintiffs failed to give notice of the claims during the policy period, where the claim was specifically defined as including an investigation by the Department of Labor or the Pension Benefit Guaranty Corporation.
- The excess coverage didn’t kick in until the policy limits in the basic policies had been reached (which was not possible given the court’s other rulings.)
The plaintiffs were also told that they couldn’t amend their complaint to include the brokers who they claimed were supposed to be providing them with specific coverage, but failed to do so.
No one wants to wade through the details of these policies, but those who fail to have them reviewed by legal counsel may be in for rude surprises later on. We regularly speak with very competent employee benefits professionals who confuse the required ERISA bonding coverage (which provides recovery to the plan, not the fiduciaries) with fiduciary liability insurance, or who think D&O policies cover their ERISA plan committee actions (many such policies either don’t cover ERISA claims at all, or don’t cover lower level committee members). We frequently are told that a plan sponsor maintains fiduciary liability insurance, only to be sent the ERISA bond when we ask to see a copy of the policy. In many of those cases, we have to deliver the bad news that the fiduciaries have no personal coverage at all.
Clearly, the time to review coverage and obtain any required endorsements is not when the accusations of fiduciary breach are raised. Just a few among the points to be considered in a thorough review of coverage are the following:
- Your broker is not a lawyer. Don’t rely on her to interpret legal clauses in your policy. Get a qualified independent review.
- Don’t assume that employer indemnification obligations are a substitute for coverage or will cover any gaps in coverage. There will be legal constraints (for example, under state corporate law) on the company’s ability to provide full indemnification and the commitment may become worthless in the event of bankruptcy or other financial distress.
- Understand the exclusions in your policy and find out whether endorsements are available to eliminate some of them.
- Consider whether your policy limits should be increased. Courts seem to be awarding ever increasing damages in fiduciary breach cases.
- Understand and follow the notice requirements in your policies.